Langley, B.C. – This press release discusses financial results for Hardwoods Distribution Inc. (“Hardwoods” or the “Company”) for the three and twelve months ended December 31, 2013.
Hardwoods is one of North America’s largest wholesale distributors of hardwood lumber and related sheet good products, operating a network of 32 distribution centres in the US and Canada.
(For the three and twelve months ended December 31, 2013)
* Revenue increased 22.8% in the fourth quarter and 21.3% for the full year, compared to the same periods in 2012.
* The Company increased gross profit by 25.3% in the fourth quarter and by 25.7% in the 12-month period, compared to the same periods in 2012.
* Fourth quarter EBITDA climbed 75.2% to $4.2 million, and full-year EBITDA increased 73.1% to $21.4 million.
* Fourth quarter profit increased 80.9% to $2.4 million, while full-year profit climbed 111.5% to $13.1 million.
“We continued to build momentum in 2013 as our market expansion strategies combined with strong demand growth in the US market to drive stronger financial results,” said Lance Blanco, President and CEO of Hardwoods. “At $371 million, our full-year sales performance has now returned to the levels we were achieving at our peak in 2005 and 2006. However, we are achieving these results at a much lower level of housing starts.”
According to the US Census Bureau, US housing starts increased to 927,000 in 2013, 19% higher than in 2012, but still less than half the 2.1 million housing starts recorded in 2005. Canadian housing starts declined to 188,000, from 215,000 in 2012 according to Canada Mortgage and Housing Corporation, reflecting the impact of new mortgage rules designed to cool the residential housing market.
The Company’s results were bolstered by the continued strengthening of product prices during the year. Average hardwood lumber prices, as measured by the Hardwood Review Kiln Dried Lumber Price Index, were up approximately 12% compared to 2012, due to strong market demand. Sheet good pricing also increased year-over-year, rising sharply in the first half of the year due to the combination of strong demand and the imposition in the US of trade duties on hardwood panel products imported from China. Panel prices softened in the fourth quarter when the US trade case against Chinese panel imports was summarily dismissed.
“Our successful strategy of expanding our presence in the US, leveraging our import program and increasing our business with commercial customers has enabled us to capitalize on the improving conditions in US,” said Mr. Blanco. “Our May 2013 acquisition of an import lumber business in Leland, North Carolina complemented this strategy. While we acquired the Leland business primarily for the direct access it gives us to international hardwood lumber producers, this well-priced acquisition also gave us a new presence on the US East Coast, nicely timed to the housing cycle. We generated approximately $2.9 million of sales from our new branch in 2013, and our entire distribution network benefited from its positive impact on our import program.”
Hardwoods ended 2013 in a very strong financial position. A combination of strong cash flow and a fourth quarter reduction in inventory and accounts receivable enabled the Company to reduce its bank line to just $27.9 million at year end. As at December 31, 2013, Hardwoods’ debt-to-EBITDA ratio was a conservative 1.3 times, its debt-to-capital ratio was just 23.5%, and the Company had over $29.8 million of unused borrowing capacity.
“We are well positioned to finance the ongoing growth we expect to capture in 2014 and beyond,” said Mr. Blanco. “Based on our current financial position and our positive outlook, our Board of Directors has approved an increase in our quarterly dividend from 3.5 cents per share to 4.5 cents per share. Going forward, we will continue working to enhance shareholder value by growing our business both organically and through the pursuit of well-priced acquisitions that complement our business strategy.”
Results from Operations – Three Months Ended December 31, 2013
For the three months ended December 31, 2013, Hardwoods’ total sales increased by 22.8% to $91.1 million, from $74.1 million in the fourth quarter of 2012. The year-over-year improvement reflects a 17.7% increase in sales due to stronger underlying sales activity and higher product prices, together with a 5.1% increase due to the positive impact of a weaker Canadian dollar.
Sales in the United States, as measured in US dollars, increased 19.5% to $64.8 million, reflecting strong demand and product pricing in the US. Sales in Canada, as measured in Canadian dollars, increased 13.2% to $23.1 million, primarily due to higher product prices.
Fourth quarter gross profit increased to $16.0 million, up 25.3% from $12.8 million during the same period last year. The improvement in gross profit reflects higher sales revenue, together with an increase in gross profit margin. As a percentage of sales, fourth quarter gross profit increased to 17.6% from 17.2% in the fourth quarter of 2012. Gross profit margin at 17.6% in the fourth quarter of 2013 was below Hardwood’s target rate of 18%, reflecting a drop in market prices for hardwood panel products in November after the trade case against Chinese import panels was dismissed, which lowered margins as Hardwoods sold higher-priced inventory into the market. This negative impact on gross margin was partially offset by a refund of duties paid on a portion of our import purchases made from China in 2013.
Operating expenses for the fourth quarter were $12.2 million, compared to $10.7 million in the fourth quarter of 2012, reflecting higher costs to support the increase in sales and the negative impact of a weaker Canadian dollar on US operating expenses. As a percentage of sales, fourth quarter operating expenses were 13.4% of sales, down from 14.4% in the same period in 2012.
Fourth quarter EBITDA increased 75.2% to $4.2 million from $2.4 million during the same period in 2012. This significant increase reflects higher gross profit, partially offset by increased operating expenses before depreciation.
Profit for the period also improved, increasing to $2.4 million from $1.3 million in 2012. The year-over-year improvement primarily reflects higher EBITDA, partially offset by a $0.6 million increase in income tax expense, a $0.1 million increase in depreciation and a $0.1 million increase in net finance cost.
Results from Operations – 12 Months Ended December 31, 2013
For the 12 months ended December 31, 2013, Hardwoods’ total sales increased by 21.3% to $371.2 million, from $306.1 million in 2012. The year-over-year increase includes an 18.7% increase due to stronger underlying sales activity and higher product prices, together with a 2.6% increase due to the positive impact of a weaker Canadian dollar.
The sales growth came primarily from Hardwoods’ US operations where sales activity increased by US $49.9 million. Incremental revenue from the Leland business acquired in May 2013 accounted for US$2.8 million of this growth, with organic growth accounting for the remaining US$47.1 million. Sales in Canada, as measured in Canadian dollars, increased by 8.2% year-over-year.
Full-year gross profit increased 25.7% to $67.6 million, from $53.8 million in 2012. This gain reflects higher sales revenue together with a higher gross profit margin. As a percentage of sales, gross profit increased to 18.2% from 17.6% in 2012, primarily due to stronger-than-normal margins in the second quarter as Hardwoods sold lower-cost inventory into a rising price market. Over the longer term, the Company views 18% as a sustainable gross margin target for its business.
Annual operating expenses were $47.7 million in 2013, compared to $42.7 million in 2012, reflecting incremental operating costs to support higher sales, the impact of a weaker Canadian dollar on US operating costs and added expenses from the Leland operation. As a percentage of sales, 2013 operating expenses decreased to 12.8% of sales, from 14.0% in 2012.
EBITDA for the 12 months increased 73.1% to $21.4 million, from $12.4 million in 2012. The strong EBITDA result reflects higher gross profits, partially offset by higher operating expense before depreciation.
Profit for the period increased 111.5% to $13.1 million, from $6.2 million in 2012. This reflects the $9.0 million increase in EBITDA and the $0.6 million decrease in net finance cost, partially offset by a $2.5 million increase in income tax expense and $0.2 million increase in depreciation.
Forecasters continue to predict a multi-year strengthening trend for the US residential construction market. With approximately 75% of its business in the US and approximately 60% of its products going into the residential construction market, Hardwoods is well positioned to capitalize on the continuing market recovery.
The outlook for the US repair and remodeling market is also positive with growth of over 10% forecast into 2014 by Harvard’s Joint Center for Housing Studies. Indicators for commercial construction are for steady mid-single digit growth in 2014. The positive outlook for the US market is strengthened by the recent dismissal of the US trade case against imported hardwood plywood panels produced in China.
“With trade duties eliminated and the expectation of ongoing strength in pricing for key products, we anticipate 2014 will be a strong year for our US operations,” said Mr. Blanco.
The outlook for the Canadian market remains neutral, with 2014 housing starts expected to remain unchanged from 2013 levels. Growth in the Canadian renovation and commercial construction markets is expected to be in line with inflation.
The fourth quarter of 2013 saw the value of the Canadian dollar begin to retreat relative to the US dollar, benefitting Hardwoods by 1) increasing the value of sales and profits earned in Hardwoods’ US operations when translated into Canadian dollars for financial reporting purposes; 2) increasing the selling price in Canada of US dollar denominated products sold to our Canadian customers; and 3) improving the export-competitiveness of Hardwoods’ Canadian industrial customers, many of whom have the capability to sell their manufactured products into the US. While the overall impact on 2013 results was not significant, a sustained reduction in the value of the Canadian dollar would prove to be a positive trend for Hardwood’s business going forward.
Hardwoods’ goal in 2014 continues to be to capture the growth potential in the US market, both in terms of sales volume and product pricing. With a consistent gross margin percentage and the ability to pass price increases through to customers, the Company’s business model enables growth in volume and pricing to have a significant positive impact on its earnings and cash flow.
Following a major review of its business strategy, Hardwoods’ strategic priorities in 2014 will be to:
1. Leverage Imports: Grow sales of its high-quality proprietary import lines, supported by its established quality assurance team located in Asia, while also expanding international sourcing capabilities to bring world-wide product solutions to Hardwoods customers.
2. Strengthen Commercial: Capitalize on the significant opportunities in the commercial market. In particular, Hardwoods intends to grow its supply of first-tier product supply for commercial customers and capitalize on its import capabilities to offer both domestic and off-shore product solutions to the commercial sector.
Hardwoods’ Board of Directors will continue to review the Company’s financial performance and assess distribution levels on a regular basis. However in terms of cash utilization the Company’s primary focus in 2014 will remain on retaining the cash necessary to finance the significant market growth opportunity in the US and to keep the Company’s balance sheet strong to support strategic acquisitions.
A more detailed discussion of the Company’s financial performance can be found in its Management's Discussion and Analysis (MD&A) for the three and twelve months ended December 31, 2013. The MD&A will be posted, along with the Company’s annual audited financial statements on SEDAR (www.sedar.com) and on the Company’s website http://www.hardwoods-inc.com.
Non-GAAP Measures – EBITDA
References to “EBITDA” are to earnings before interest, income taxes, depreciation and amortization, where interest is defined as net finance costs as per the consolidated statement of comprehensive income. In addition to profit, the Company considers EBITDA to be a useful supplemental measure of a company’s ability to meet debt service and capital expenditure requirements, and the Company interprets trends in EBITDA as an indicator of relative operating performance.
EBITDA is not an earnings measure recognized by IFRS and does not have a standardized meaning prescribed by IFRS. Investors are cautioned that EBITDA should not replace profit or cash flows (as determined in accordance with IFRS) as an indicator of Hardwoods’ performance. The Company’s method of calculating EBITDA may differ from the methods used by other issuers. Therefore, the Company’s EBITDA may not be comparable to similar measures presented by other issuers. For a reconciliation between EBITDA and profit as determined in accordance with IFRS, please refer to the discussion of Results of Operations described in section 3.0 of Management's Discussion and Analysis (MD&A) for the three and twelve months ended December 31, 2013 available at www.sedar.com and the Summary of Results section of this news release.
Source: Hardwoods Distribution
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